Deficits, Debts and Demagogues

(Photo: _Davo_; Edited: JR / TO)Government budget deficits and the national debt are occasions more for demagogues to preach than for serious analysis. The usual suspects, conservatives and liberals, are gearing up for the election. Each side uses the large federal budget deficits and fast-accumulating national debt to beat its tired ideological drums. Conservatives insist that deficits and debts require huge cuts in government jobs and job benefits (especially pensions) and in social programs (especially Medicare and Medicaid). Liberals push for less drastic cuts in federal employment and programs because "the economy still needs stimulus." Liberals promise that when prosperity returns and Washington's tax revenues rise, we can painlessly use them to reduce the accumulated debt.

The two sides have been promoting these positions for decades, long before the current deficits and debts arrived. The latter are just opportunities exploited by both sides to repeat old sermons to their faithful. However, there are important political lessons to learn by connecting deficits and debts to the demagogues using them these days.

What are the actual causes of recent years' high deficits that have boosted the national debt? The first cause is the capitalist crisis. When millions are fired, their lost income means lower individual income taxes flowing to Washington. When businesses lose sales, their incomes also drop and thus also their income tax payments to Washington. Lower sales mean lower sales taxes flowing to state governments. Our collapsed housing market lowers property values, and that drops the property taxes on which local governments depend.

Second, even as government revenue shrank because of the crisis, Washington undertook extremely costly bailouts of large banks and other corporations as part of stimulating a crisis-ridden capitalist economy. Washington also sent more money to states and localities to offset a part of their revenue loss because of the crisis. Crisis-induced revenue losses plus crisis-induced expenditure increases are the major causes of today's large deficits and national debt increases.

The third major cause of federal deficits and debts has been huge reductions in corporate income taxes and individual incomes taxes on the richest Americans. At the end of World War II, for every dollar paid to Washington in individual income taxes, corporate profits' taxes amounted to $ 1.50. Today, the ratio is very, very different: for every $1 paid in individual income taxes, corporations pay $ 0.25. Despite the effects on statistics of S corporations and other tax loopholes for businesses and executives, the bottom line shows a massive shift of the federal tax burden from business onto individuals. Over the same period, the top rate of the federal individual income tax fell from 94 percent to 35 percent: a massive federal tax break for the richest Americans.

The result was and remains obvious: the middle of the income distribution - the majority that is not rich and not (or not yet) really poor - had to pick up the burden. No wonder that majority of the population is upset, angry, talks endlessly about "tax revolts" and deeply distrusts politicians of all stripes who imposed the twin massive tax shifts upon them. The majority correctly fears being driven down into the mass of the poor. As that process unfolds, the majority becomes increasingly resentful and angry and looks for whom to blame.

The job of the demagogues is to deflect that anger onto a credible scapegoat. Their goal is to protect corporations and the rich (1) from the return of the tax rates they paid in the past; (2) from paying for the crisis since 2007 that they helped to cause; and (3) from paying for the government bailouts they demanded, received, and that saved them from very serious, crisis-induced problems.

The demagogues' preferred scapegoat is the public sector of our economy. So, they attack government employees and the public services they provide. Chief among their current targets are the pensions paid to retired public employees. These are denounced as primary causes of the deficits of local, state and federal budgets. Democrats and Republicans agree to cut those pensions as a way to reduce the deficits.

Yet, this scapegoating is easy to expose. Public employee pensions have not risen in any dramatic way over recent years, so they could not and did not cause the government budget deficits to zoom upward. Those pensions did not cause our national debt suddenly to soar. Capitalism's second-worst crisis in 75 years and the government's bailout program for large corporations and the stock market, that's what caused the deficits and the exploding national debt.

Attacking workers' pensions is preferred because it protects corporations and the rich from blame in this time of mounting economic difficulties for most people. It pits government workers against private-sector workers. Attacking public workers' pensions undermines retirement programs to which they contributed, benefits they accepted in place of wage increases from their employer. Conservatives use lower pensions in the private sector to argue for parallel reductions in public employees' pensions; next they will use reduced public pensions as arguments to lower private-sector pensions.

Cutting public employees' pensions makes workers pay for a crisis they did not cause and for the massive government bailouts they did not get. How convenient for corporations and the rich that Democrat and Republican demagogues are "concerned about the problem of government pensions." Instead of scapegoating public workers, they could remember the lessons of the last time US capitalism crashed.

In the 1930s Great Depression, powerful unions, socialist and communist parties got the government to raise taxes on corporations and the rich. Those tax revenues helped fund a New Deal for most Americans by (1) creating the Social Security system for the millions over 65, (2) creating the unemployment compensation system for the millions without jobs and (3) creating and filling over 12 million federal jobs.

As corporations and the rich rolled back the New Deal over recent decades, they created conditions for another massive crisis. Now, they aim to turn their crisis into another chapter in that roll back. When capitalism delivers these results, it has outlived its usefulness for all but the few beneficiaries of that system.

Richard D. Wolff is Professor of Economics Emeritus, University of Massachusetts, Amherst where he taught economics from 1973 to 2008. He is currently a Visiting Professor in the Graduate Program in International Affairs of the New School University, New York City. He also teaches classes regularly at the Brecht Forum in Manhattan. Earlier he taught economics at Yale University (1967-1969) and at the City College of the City University of New York (1969-1973). In 1994, he was a Visiting Professor of Economics at the University of Paris (France), I (Sorbonne). His work is available at rdwolff.com and at democracyatwork.info.

Deficits, Debts and Demagogues

(Photo: _Davo_; Edited: JR / TO)Government budget deficits and the national debt are occasions more for demagogues to preach than for serious analysis. The usual suspects, conservatives and liberals, are gearing up for the election. Each side uses the large federal budget deficits and fast-accumulating national debt to beat its tired ideological drums. Conservatives insist that deficits and debts require huge cuts in government jobs and job benefits (especially pensions) and in social programs (especially Medicare and Medicaid). Liberals push for less drastic cuts in federal employment and programs because "the economy still needs stimulus." Liberals promise that when prosperity returns and Washington's tax revenues rise, we can painlessly use them to reduce the accumulated debt.

The two sides have been promoting these positions for decades, long before the current deficits and debts arrived. The latter are just opportunities exploited by both sides to repeat old sermons to their faithful. However, there are important political lessons to learn by connecting deficits and debts to the demagogues using them these days.

What are the actual causes of recent years' high deficits that have boosted the national debt? The first cause is the capitalist crisis. When millions are fired, their lost income means lower individual income taxes flowing to Washington. When businesses lose sales, their incomes also drop and thus also their income tax payments to Washington. Lower sales mean lower sales taxes flowing to state governments. Our collapsed housing market lowers property values, and that drops the property taxes on which local governments depend.

Second, even as government revenue shrank because of the crisis, Washington undertook extremely costly bailouts of large banks and other corporations as part of stimulating a crisis-ridden capitalist economy. Washington also sent more money to states and localities to offset a part of their revenue loss because of the crisis. Crisis-induced revenue losses plus crisis-induced expenditure increases are the major causes of today's large deficits and national debt increases.

The third major cause of federal deficits and debts has been huge reductions in corporate income taxes and individual incomes taxes on the richest Americans. At the end of World War II, for every dollar paid to Washington in individual income taxes, corporate profits' taxes amounted to $ 1.50. Today, the ratio is very, very different: for every $1 paid in individual income taxes, corporations pay $ 0.25. Despite the effects on statistics of S corporations and other tax loopholes for businesses and executives, the bottom line shows a massive shift of the federal tax burden from business onto individuals. Over the same period, the top rate of the federal individual income tax fell from 94 percent to 35 percent: a massive federal tax break for the richest Americans.

The result was and remains obvious: the middle of the income distribution - the majority that is not rich and not (or not yet) really poor - had to pick up the burden. No wonder that majority of the population is upset, angry, talks endlessly about "tax revolts" and deeply distrusts politicians of all stripes who imposed the twin massive tax shifts upon them. The majority correctly fears being driven down into the mass of the poor. As that process unfolds, the majority becomes increasingly resentful and angry and looks for whom to blame.

The job of the demagogues is to deflect that anger onto a credible scapegoat. Their goal is to protect corporations and the rich (1) from the return of the tax rates they paid in the past; (2) from paying for the crisis since 2007 that they helped to cause; and (3) from paying for the government bailouts they demanded, received, and that saved them from very serious, crisis-induced problems.

The demagogues' preferred scapegoat is the public sector of our economy. So, they attack government employees and the public services they provide. Chief among their current targets are the pensions paid to retired public employees. These are denounced as primary causes of the deficits of local, state and federal budgets. Democrats and Republicans agree to cut those pensions as a way to reduce the deficits.

Yet, this scapegoating is easy to expose. Public employee pensions have not risen in any dramatic way over recent years, so they could not and did not cause the government budget deficits to zoom upward. Those pensions did not cause our national debt suddenly to soar. Capitalism's second-worst crisis in 75 years and the government's bailout program for large corporations and the stock market, that's what caused the deficits and the exploding national debt.

Attacking workers' pensions is preferred because it protects corporations and the rich from blame in this time of mounting economic difficulties for most people. It pits government workers against private-sector workers. Attacking public workers' pensions undermines retirement programs to which they contributed, benefits they accepted in place of wage increases from their employer. Conservatives use lower pensions in the private sector to argue for parallel reductions in public employees' pensions; next they will use reduced public pensions as arguments to lower private-sector pensions.

Cutting public employees' pensions makes workers pay for a crisis they did not cause and for the massive government bailouts they did not get. How convenient for corporations and the rich that Democrat and Republican demagogues are "concerned about the problem of government pensions." Instead of scapegoating public workers, they could remember the lessons of the last time US capitalism crashed.

In the 1930s Great Depression, powerful unions, socialist and communist parties got the government to raise taxes on corporations and the rich. Those tax revenues helped fund a New Deal for most Americans by (1) creating the Social Security system for the millions over 65, (2) creating the unemployment compensation system for the millions without jobs and (3) creating and filling over 12 million federal jobs.

As corporations and the rich rolled back the New Deal over recent decades, they created conditions for another massive crisis. Now, they aim to turn their crisis into another chapter in that roll back. When capitalism delivers these results, it has outlived its usefulness for all but the few beneficiaries of that system.

Richard D. Wolff is Professor of Economics Emeritus, University of Massachusetts, Amherst where he taught economics from 1973 to 2008. He is currently a Visiting Professor in the Graduate Program in International Affairs of the New School University, New York City. He also teaches classes regularly at the Brecht Forum in Manhattan. Earlier he taught economics at Yale University (1967-1969) and at the City College of the City University of New York (1969-1973). In 1994, he was a Visiting Professor of Economics at the University of Paris (France), I (Sorbonne). His work is available at rdwolff.com and at democracyatwork.info.